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G10 Macro Rates Market Analysis – Weekly Review – 8th February 2021

Monday, February 08, 2021

With the Pacific G10 Macro Rates Team 
The week started with Chinese PMI data pulling back a little but remaining in expansionary territory. The most interesting central bank activity stemmed from Australia and the UK.

RBA Governor Lowe spoke after they released the quarterly Statement on Monetary Policy. Along with discussing his staff projections from earlier in the week, he expanded on the background of surprisingly bringing the QE A$100bln increase forward, due to the reserve bank not meeting its objectives until 2024.

The BoE mandated a technology improvement amongst clearing banks and kicked off an investigation into tiering of cash balances, so that negative rates could be implemented. However, the Bank also dashed expectations of an immediate move to negative rates with multiple members reiterating that this was not likely any time soon. This message felt genuine, and the market took it at face value with the rate forwards selling off and taking their implied levels back above the zero bound.

In Italy, ex ECB President Draghi accepted the role to forming a technocratic Italian government. The odds are in his favour as most polls are going against incumbent parties, with many senators standing to lose their seats because of previously enacted reforms. Self-preservation implies a low probability of a general election.

North America
US: ISM surveys declined a little form the previous month but with all measures in expansionary territory, some strongly so, it was not viewed as economic weakness.

Nonfarm Payrolls disappointed at +49k (105k exp., -140k rev.) and the revisions were also a drag at -159k. The unemployment rate dropped to +6.3% (6.7% exp., 6.7% rev.) but this was more of a factor of the workers leaving the labor force with the participation rate dropping to +61.4% (61.5% exp., 61.5% rev.) The underemployment rate, currently at +11.1% (11.7% rev.) still has over 4% to go before it reaches its pre COVID lows. Secretary Yellen reiterated this message over the weekend on a nationwide talk show.

Canada: Jan Manufacturing PMI was expansionary at +54.4 (57.9 rev.) Jan employment figures were shockingly weak at -212.8k (-40.0k exp., -62.6k rev.) pushing the unemployment up rate to +9.4% (8.9% exp., 8.6% rev.) along with a drop in the participation rate to +64.7% (64.9% exp., 64.9% rev.) there was no optimism hiding in the data. This move was driven by lockdowns in Ontario and Quebec, so the market ignored the data and priced in higher forward rates.

Eurozone: Jan CPI was unexpectedly strong at +0.2% MoM (-0.1% exp., 0.3% rev.) with the core measure at +1.4% YoY (0.9% exp., 0.2% rev.) The market ignored the data as German VAT hikes, basket reweighting’s and measurement issues were thought to be the cause of most of the upswing. Dec Retail Sales were stable +2.0% MoM (2.8% exp., -6.1% rev.) and +0.6% YoY (1.2% exp., -2.9% rev.) Dec Unemployment moved sideways, at 8.3% (8.3% exp., 8.3% rev.)

French Jan CPI was string at +0.3% MoM (0.0% exp., 0.2% rev.) and +0.8% YoY (0.5% exp., 0.0% rev.) but payrolls disappointed -0.2% QoQ (-0.7% exp., 1.6% rev.). German December retail sales reflected strengthening lockdowns at -9.6% MoM (-2.0% exp., 1.9% rev.) and +1.5% YoY (4.7% exp., 5.6% rev.)

Italian Jan PMIs strengthened, but not all the sub-indices reached expansionary territory. Jan CPI dropped -1.1% MoM (-1.4% exp., 0.2% rev.) +0.5% YoY (0.2% exp., -0.3% rev.) December unemployment was static at 9.0% (9.0% exp., 8.9% rev.) but still well within its 5-year downward trend. 4Q GDP reflected the economy bouncing in and out of restrictions at -2.0% QoQ (-2.0% exp., 15.9% rev.) and -6.6% YoY (-6.6% exp., -5.0% rev.) Dec retail sales were strong at +2.5% MoM (1.6% exp., -6.9% rev.) lifting the annual measure to -3.1% YoY (-4.8% exp., -8.1% rev.)

Sweden: Norwegian December Industrial Production +3.4% MoM (1.8% rev.)

Norway: Norwegian November unemployment numbers continued to improve with the Unemployment Rate (AKU) 5.0% (5.2% exp., 5.2% rev.) However, economic restrictions still pushed December Retail Sales to -5.7% MoM (-0.6% exp., 2.9% rev.)

No tier 1 data


House prices weakened a little, but the significance of an off season print in lockdown is limited. The Bank of England Bank kept bank rate unchanged at +0.1% (0.1% exp., 0.1% rev.)


Australia: The RBA kept its cash and 3yr target rates unchanged, with both at 0.1% (0.1% exp., 0.1% rev.) additionally it announced a shock increase of A$100bln in QE along with guidance that “the board does not expect the conditions (to hike) to be met until 2024 at the earliest.” The shock was in the earlier timing of the QE increase, not the size and is quite understandable as southern hemisphere vaccine rollouts are much delayed in comparison to the north. Housing data showed that the 20-year Australian house buying frenzy is far from over with building approvals and prices jumping strongly.

New Zealand: 4Q Employment shocked the market as it printed +0.6% QoQ (0.1% exp., -0.8% rev.) reducing the unemployment rate to +4.9% (5.6% exp., 5.3% rev.) and whilst some of this was explained by a drop in the participation rate to +70.2% (70.3% exp., 70.1% rev.) the rates market moved 30bp higher ion the forwards. Some of this pricing is optimism, but at least part of the move can be explained by mortgage hedging. House Prices printing +12.8% YoY (11.1% rev.) demonstrated the demand of mortgage products.

 For further information on the Pacific G10 Macro Rates team, their experience and strategy please see below  

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IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation.

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